While this site is full of useful information, industry terms and calculators that will help you research the mortgage approval process in detail, this particular page was designed to give you a thorough outline of the important components involved in getting qualified for a new mortgage loan.

Wikipedia

A mortgage loan is a loan secured by real property through the use of a document which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.

Mortgage Approval Components

Mortgage lenders approve borrowers for a loan, which is secured by real estate, based on a standard set of guidelines that are generally determined by the type of loan program.

The following bullets are the main components of a mortgage approval:

Debt-To-Income (DTI) Ratio

A borrower’s DTI Ratio is a measurement of their income to monthly credit and housing liabilities.

The lower the DTI ratio a borrower has (more income in relation to monthly credit payments), the more confident the lender is about getting paid on time in the future based on the loan terms.

Credit

Credit scores and history are used by lenders as a tool to determine the estimated risk associated with a borrower.

Loan-to-Value (LTV)

Loan-to-Value, or LTV, is a term lenders use when comparing the difference between the outstanding loan amount and a property’s value.

Certain loan programs require a borrower to invest a larger down payment to avoid mortgage insurance, while some government loan programs were created to help buyers secure financing on a home with 96.5% to 100% LTV Ratios.

EX: A Conventional Loan requires the borrower to purchase mortgage insurance when the LTV is greater than 80%. To avoid having to pay mortgage insurance, the borrower would have to put 20% down on the purchase of a new property. On a $100,000 purchase price, 20% down would equal $20,000.

Mortgage Programs

There are government insured loan programs, such as FHA, USDA and VA home loans, as well as conventional and jumbo financing.

A mortgage professional will take into consideration your individual LTV, DTI, Credit and Property Type scenario to determine which loan program best fits your needs and goals.

Pre-Qualification Letter Basics

Getting a mortgage qualification letter prior to looking for a new home with an agent is an essential first step in the home buying process.

Besides providing the home buyer with an idea of their monthly payments, down payment requirements and loan program terms to budget for, a Pre-Qualification Letter gives the seller and agents involved a better sense of security and confidence that the purchase contract will be able to close on time.

There is a big difference between a Pre-Qualification Letter and a Mortgage Approval Conditions List.

The Pre-Qualification Letter is generally issued by a loan officer after credit has been pulled, income and assets questions have been addressed and some of the other initial borrower documents have been previewed. The Pre-Qualification Letter is basically a loan officer’s written communication that the borrower fits within a particular loan program’s guidelines.

The Mortgage Approval Conditions List is a bit more detailed, especially since it is usually issued by the underwriter after an entire loan package has been submitted.

Even though questions about gaps in employment, discrepancies on tax returns, bank statement red flags, and other qualifying related details should be addressed before a loan officer issues a Pre-Qualification Letter, the final Mortgage Approval Conditions List is where all of those conditions will pop up. In addition to borrower related conditions, there are inspection clarifications, purchase contract updates and appraised value debates that may show up on this list. This will also list prior to doc and funding conditions so that all parties involved can have an idea of the timeline of when things are due.

Let’s start with the most commonly asked question about mortgage loans. Getting a Pre-Qualification Letter for a new home purchase is mainly to let everyone involved in the transaction know what type of mortgage money the buyer is approved to borrower from the lender.

The Pre-Qualification Letter is based on loan program guidelines pertaining to a borrower’s DTI, LTV, Credit, Property Type and Residence Status.

A complete Pre-Qualification Letter should let the borrower know the exact terms of the loan amount, down payment requirements and monthly payment, including principal, interest, taxes, insurance and any additional mortgage insurance premiums.

Keep in mind, one of the most important items to remember when looking into financing is that there is sometimes a difference in the amount a borrower can qualify for vs what’s in their budget for a comfortable and responsible monthly payment.

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Closing Costs / Fees

The actual cost of obtaining a mortgage mainly depends on whether or not the borrower is paying points for a lower mortgage rate. In some cases, there are also other loan processing and underwriting fees associated with the work involved in the transaction.

Fortunately, there are several consumer protection policies implemented by the government to help borrowers understand their options during the initial mortgage pre-qualification process. However, please keep in mind that there may be other closing costs not associated with a mortgage or real estate transaction to be aware of. Appraisal, pre-paid property taxes, insurance and interest, HOA dues and inspections are a few additional out-of-pocket expenses you should budget for.

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Mortgage Rates

While mortgage interest rates may change several times a day, there are a few market factors you can pay attention to which may impact your final payment.

Whether you’re shopping for the best rate, or trying to determine the difference between the Note Rate and APR, it definitely helps to understand what questions to ask a mortgage lender about your specific loan scenario.

Why do I have to obtain another Pre-Qualification Letter from a different lender when I make an offer on a particular home?

Cross-qualification is imminent in certain markets, especially with bank-owned or short sale properties. Some of the large banks that own homes require any potential home buyer to be qualified with their preferred lender – who is typically a representative of the bank that owns the home. This is one way for the bank to recoup a small portion of their loss on the home from the previous foreclosure or short sale.

In other scenarios, the listing agent/seller prefers to feel safe in knowing the home buyer they’ve selected has a back up plan should their current one fall apart.

I was pre-qualified, but after I found a home and signed a contract, my lender denied my loan. Why is this a common trend that I hear about?

There are literally hundreds of moving parts with a real estate purchase transaction that can impact a final approval up until the last minute, and then after the fact in some unfortunate instances.

With the borrower – credit scores, income, employment and residence status can change.

With the mortgage program – Interest rates can change affecting the DTI ratio, mortgage insurance companies change guidelines or go out of business, new FICO score requirements…. the list can go on.

It’s important to make sure your initial paperwork is reviewed and approved by an underwriter as soon as possible. Stay in close contact with your mortgage approval team throughout the entire process so that they’re aware of any delays or changes in your status that could impact the final approval.

What happens if I can’t find a home before my pre-qualification letter expires?

Depending on your mortgage program and final underwritten conditions, you may have to re-submit the most recent 30 days of income and asset documents, as well as have a new credit report pulled.

Worst case scenario, the lender may even require a new appraisal that reflects comparables within a 90 day period.

It’s important to know critical approval / condition expiration dates if your real estate agent is showing you available short sales, foreclosures or other distressed property purchase types that have a potential of dragging a transaction out several months.

Do I have to sell my current home before I can qualify for a new mortgage payment?

Yes, No and Maybe…

If you are in a financial position where you are qualified to afford both your current residence and the proposed payment on your new house, then the simple answer is No!

Qualifying based on your Debt-to-Income ratio is one thing, but remember to budget for the additional expenses of maintaining multiple properties. Everything from mortgages payments, increased property taxes and hazard insurance to unexpected repairs should be factored into your final decision.

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Information is subject to change without notice. This is not an offer for extension of credit or a commitment to lend. Subject to credit and underwriter approval. Refinancing an existing loan may result in higher total finance charges over the life of the loan.